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Level 3 Reports First Quarter 2011 Results

The following describes and reconciles those financial measures as reported under accounting principles generally accepted in the United States (GAAP) with those financial measures as adjusted by the items detailed below and presented in the accompanying news release. These calculations are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP. In keeping with its historical financial reporting practices, the company believes that the supplemental presentation of these calculations provides meaningful non-GAAP financial measures to help investors understand and compare business trends among different reporting periods on a consistent basis, independently of regularly reported non-cash charges and infrequent or unusual events.

Consolidated Revenue is defined as total revenue from the Consolidated Statements of Operations.

Communications Revenue is defined as communications revenue from the Consolidated Statements of Operations.

Core Network Services Revenue includes revenue from transport, infrastructure, data and local and enterprise voice communications services.

Communications Gross Margin ($) is defined as communications revenue less communications cost of revenue from the Consolidated Statements of Operations.

Communications Gross Margin (%) is defined as communications gross margin ($) divided by communications revenue. Management believes that gross margin is a relevant metric to provide to investors, as it is a metric that management uses to measure the margin available to the company after it pays third party network services costs; in essence, a measure of the efficiency of the company’s network.

Adjusted EBITDA is defined as net income (loss) from the Consolidated Statements of Operations before income taxes, total other income (expense), non-cash impairment charges, depreciation and amortization and non-cash stock compensation expense.

Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by total revenue.

           
Adjusted EBITDA Metrics         Q1 2011
($ in millions)         Communications         Other         Consolidated
               
Net Loss ($201) $(4) ($205)
Income Tax Expense 27 - 27
Total Other (Income) Expense 171 3 174
Depreciation and Amortization 203 1 204
Non-cash Stock Compensation 25 - 25
Adjusted EBITDA $225 $0 $225
 
Revenue $914
 
Adjusted EBITDA Margin 24.6%
           
Adjusted EBITDA Metrics         Q4 2010
($ in millions)         Communications         Other         Consolidated
               
Net Loss ($52) $- ($52)
Income Tax Benefit (93) - (93)
Total Other (Income) Expense 140 1 141
Depreciation and Amortization 210 3 213
Non-cash Stock Compensation 17 - 17
Adjusted EBITDA $222 $4 $226
 
Revenue $904
 
Adjusted EBITDA Margin 24.6%
           
Adjusted EBITDA Metrics         Q1 2010
($ in millions)         Communications         Other         Consolidated
               
Net Loss ($235) ($3) ($238)
Income Tax Expense 1 - 1
Total Other (Income) Expense 196 - 196
Depreciation and Amortization 224 1 225
Non-cash Stock Compensation 16 - 16
Adjusted EBITDA $202 ($2) $200
 
Revenue $900
 
Adjusted EBITDA Margin 22.4%
 

Management believes that Adjusted EBITDA and Adjusted EBITDA Margin are relevant and useful metrics to provide to investors, as they are an important part of the company’s internal reporting and are key measures used by Management to evaluate profitability and operating performance of the company and to make resource allocation decisions. Management believes such measures are especially important in a capital-intensive industry such as telecommunications. Management also uses Adjusted EBITDA and Adjusted EBITDA Margin to compare the company’s performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure from period to period its ability to fund capital expenditures, fund growth, service debt and determine bonuses. Adjusted EBITDA excludes non-cash impairment charges and non-cash stock compensation expense because of the non-cash nature of these items. Adjusted EBITDA also excludes interest income, interest expense and income taxes because these items are associated with the company’s capitalization and tax structures. Adjusted EBITDA also excludes depreciation and amortization expense because these non-cash expenses reflect the impact of capital investments which management believes should be evaluated through free cash flow. Adjusted EBITDA excludes the gain (or loss) on extinguishment of debt and other, net because these items are not related to the primary operations of the company.

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